Bitcoin, Ethereum and more recently DOGEcoin are getting a huge amount of publicity lately, fuelled by the rise of sports personalities creating NFTs and, or course, famous Twitter crypto troll @ElonMusk, who sends the price of tissues parabolic if he so much as sneezes in earshot of his 45m followers.
With decentralisation being a main selling point of blockchain technology and cryptocurrency, no central authority controls it which means your gains can't be taxed, right?
Sadly not and in the UK, HMRC (Her Majesty's Revenue & Customs - UK's equivalent to IRS) Crypto tax has been a "thing" for a few years now and with the UK Government racking up an eyewatering £400b ($550b) worth of debt as a result of Coronavirus, Her majesties finest will be looking for ways to recoup this.
But how do you tax this emerging asset that people are making a lot of money on?
With the number of new entrants and increased trading activity, HMRC have approached exchanges like Coinbase and Binance to share records of customers who have held or traded crypto assets and with alts hitting all time highs almost daily and Bitcoins Market cap reaching over £500b ($700b) as of early February, there are a lot of new entrants to the space, especially with the hyperbole around Bitcoins price reaching over $1m in the future.
In the UK, as Crypto is still classed as a relatively Immature asset, the government haven't yet created any form of tax wrapper for it, such as an ISA - partly because they don't consider cryptocurrencies as money/currency. This is one area where the UK are behind the States who have the ROTH IRA to avoid paying tax on their gains. As a result, gains from disposing of crypto then potentially become taxable. This mainly applies to investors/casual traders rather than miners who are in a slightly different category - not to mention most are in big mining pools due to the cost of mining these days.
So what is Capital Gains Tax (CGT)?
CGT put simply is a gain you make on an investment - it's important to note that this only applies to the GAIN and not the initial capital.
For example, if you invested 30k which increased to 100k, the tax liability falls on the 70k gain you've made.
You aren't taxed from outset however, with the first £12300 of a capital gain/s receiving a tax free allowance, It's worth noting though that this allowance is spread amongst other assets such as property (if it's not your main home or has been let out), stocks & shares and crypto so if you are disposing of other assets as well, it's worth bearing this in mind and potentially seeking tax advice on the best way to use your allowance.
The term "disposed of" is defined as:
- selling cryptoassets for money
- exchanging cryptoassets for a different type of cryptoasset (i.e. selling Bitcoin for a profit and reinvesting into the next big altcoin)
- using cryptoassets to pay for goods or services (for example, using MCO Visa, Swipe card or Plutus Visa, some of the emerging crypto debit cards)
- giving away cryptoassets to another person (there are, however, allowance for 'gifting')
In the UK, you become liable for this tax when you dispose of the asses or 'crystalise' your gain, in other words the point of selling/trading is when you become liable. If you let the value grow and never sell it, you currently aren't liable for the tax however, you have also not locked in your gain and can't spend it.
There are ways to offset allowable costs or losses which are detailed HERE.
Current UK Capital Gains Tax rates rates vary as well depending on your income, a broad approach of what you are potentially liable for is as follows
- 10% (18% Res property) if your taxable income is below £50k pa (Current higher rate tax bracket)
- 20% (28% Res prop) if your taxable income is above £50k pa
The below from HMRCs website illustrates the calculation:
Finally, it's worth noting that the above information is based on the 20/21 tax year and there is talk of HMRC increasing the tax banding to as much as 40% from existing levels, however these are currently just rumours.
Disclaimer - I'm not a financial adviser, accountant or tax specialist, this information is my interpretation from the UK HMRC website for 2020/1 and for education purposes only. If you require advice on tax, please seek the services of a tax specialist.